Analysis of environmental and economic damages from British Petroleum's Deepwater Horizon oil spill.

• Author: Smith, Lawrence C., Jr.

ABSTRACT

This study examines the environmental and economic damages caused by British Petroleum's CBP") Deepwater Horizon oil spill in the spring and summer of 2010. (1) The process of oil exploration and production is extremely challenging, offering significant rewards that are offset by equally significant risks. The world's demand for energy is constantly growing, thereby leading to extraordinary efforts and gigantic investments by energy companies to find new supplies of oil. The $365 million Deepwater Horizon was an offshore drilling unit designed to operate in waters as deep as 8000 feet, and to drill down 30,000 feet. (2) The Deepwater Horizon was drilling an exploratory well about forty-one miles off the coast of Louisiana, when on April 20, 2010, an explosion killed eleven workers and began the release of massive amounts of oil into the Gulf. (3) The well was eventually capped on July 15. (4) Total damages to BP, the environment, and the U.S. Gulf Coast economy are estimated to be $36.9 billion. (5) The damages are attributed to three major factors: (1) human error and equipment failure at BP's Deepwater Horizon offshore drilling unit; (2) failure of the U.S. government to assign, and in some cases to permit, resources to assist with the containment of the oil spill; and (3) misinformation disseminated by the news media regarding the amount and location of oil pollution in the water and on the beaches of the Gulf of Mexico.

ANALYSIS OF ENVIRONMENTAL AND ECONOMIC DAMAGES FROM BP's DEEPWATER HORIZON OIL SPILL

1. Introduction

   In the spring and summer of 2010, the BP Deepwater Horizon oil spill dominated the world news. The event was hailed as an environmental and economic disaster. World energy needs are constantly growing, resulting in extraordinary efforts and gigantic investments by energy companies to find new supplies of oil. Oil exploration and production is well known for its tremendous challenges, working in harsh environments, and using the latest and most complex technologies. Successful operations can lead to significant rewards, but these are offset by equally significant risks. The purpose of this paper is to examine the environmental and economic damages caused by BP's Deepwater Horizon oil spill in the spring and summer of 2010.

   The Deepwater Horizon was an offshore drilling rig, licensed to BP by Transocean Ltd. (6) The Deepwater Horizon was a fifth-generation dynamic positioned semi-submersible oil rig. (7) The Deepwater Horizon cost $365 million to build, and was designed to operate in waters as deep as 8000 feet, and to drill down 30,000 feet. (8) The Deepwater Horizon was drilling an exploratory well about forty-one miles off the coast of Louisiana, when on April 20, 2010, an explosion and fire killed eleven workers and began the release of massive amounts of oil into the Gulf of Mexico. (9)

   The oil spill was ultimately contained when the well was capped on July 15, 2010. (10) Damages to BP, the environment, and the U.S. Gulf Coast economy are estimated to be $36.9 billion, as will be described in this paper. (11) The damages are ascribed to three major factors: (1) human error and equipment failure at BP's Deepwater Horizon offshore drilling unit; (2) failure of the U.S. government to assign, and in some cases to permit, resources to assist with the containment of the oil spill; and (3) misinformation disseminated by the news media regarding the amount and location of oil pollution in the water and on the beaches of the Gulf of Mexico.

2. Background and Past Research

   People's concern for the environment can be traced back to ancient times. (12) Directions for proper care of the natural environment are found in ancient literature, such as the Bible and Qur'an. The Prophet Moses, known mostly for providing the Ten Commandments, also gave the ancient Israelites guidance regarding land management and care of animals. (13) The Prophet Mohammed offered instructions concerning water conservation in the Holy Qur'an. (14) Closer to the present day, the word "ecology" was coined by German biologist Ernst Haeckel in 1866. (15) While serving as President of the United States from 1901 to 1909, Theodore Roosevelt championed environmentalism. Roosevelt was famed as an avid outdoorsman and conservationist. His efforts paved the way to the formation of several national parks. (16) During the 1960s to 1980s, a number of laws were passed in the U.S. for the purpose of protecting the environment. (17) Some of the key events regarding the environment are shown in Exhibit 1. (18)

   Care for the environment is a business and social issue of increasing importance. One of the critical challenges facing businesses is how to market environmentally-friendly products and services. Damages caused by oil and gas companies have tarnished the reputations of these companies. While people in these companies are generally just as concerned about the environment as the average person, the nature of their business often puts them in situations fraught with risks of environmental pollution and damage.

   A notable recent study posed the question whether environmental and social objectives are compatible with profit maximization. (19) The researchers considered the effect that people have on environmental quality, and how companies carry out "green" marketing. (20) The study evaluated how corporate governance affects the ability of management to reconcile environmental objectives with profit maximization. (21) In a landmark study, Kinnear et al. searched for characteristics of ecologically-concerned consumers. (22) Later studies found that environmentally friendly, or "green" products, are preferred by consumers, even so far as consumers being willing to spend more to acquire these products. (23)

3. Environmental Accounting and Financial Reporting Requirements

   Accounting and financial reporting disclosures have been the subject of extensive academic research. (24) In past times, environmental issues were largely ignored by both corporations and individuals. Dangerous wastes and environmental hazards were regarded as a necessary part of a growing economy. People have come to realize the importance of minimizing waste products that could damage the environment. Preserving clean air, water, and land, to the extent possible, is generally regarded as more important than minimizing costs of products to consumers, or making the absolute highest profit by business firms. Policies have been developed to govern "waste management" and to ensure that corporations are environmentally conscious. In some cases, corporations have had to pay to correct past environmentally "unfriendly" behavior. For the most part, however, businesses have established positive reputations as being environmentally friendly. (25)

   Federal laws regarding environmental protection and remediation have substantially expanded over recent decades. Laws regarding environmental protection include the following: (1) Resource Conservation and Recovery Act of 1976 ("RCRA"); (2) Clean Air Act ("CAA"); (3) Clean Water Act ("CWA"); (4) Emergency Planning and Community Right to Know Act ("EPCRA"); and (5) Toxic Substances Control Act ("TSCA"). (26)

   The RCRA regulates the handling of hazardous wastes from generation to disposal. (27) RCRA specifies proper storage and treatment for a large number of materials. (28) The CAA regulates sources of air pollution by limiting the amounts of pollution that can be released. (29) The CWA provides regulation over sources of water pollution by limiting the discharge amounts that a firm can release. (30) The EPCRA mandates that companies with certain amounts of hazardous substances must inform their state emergency response commission so that the commission can plan a course of action in the event of an accident or other exigency. (31) The TSCA provides federal regulation regarding the manufacture, processing, and distribution in commerce of chemical substances and mixtures capable of adversely affecting heath or the environment. (32)

   Concerning remediation, federal laws include the following: (1) Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA," also known as "Superfund"); (2) Superfund Amendments and Reauthorization Act ("SARA"); and (3) RCRA. (33)

   Under CERCLA, a program was established to identify sites where hazardous substances have been or might be released into the environment, to insure that the responsible parties or the government remediate the damages to the environment, and compensate the appropriate parties for the damages to natural resources. (34) CERCLA established a trust fund for "orphan" sites, and investigates the existence of potentially responsible parties. (35) SARA concerns emergency planning in dealing with environmental hazards. (36) Pollution control provisions were included in the RCRA. (37) The RCRA authorizes the EPA to conduct removal actions and cost recovery actions where endangerment to public health, welfare, or the environment is in existence. (38)

   Responsibility for cleanup is described in CERCLA. Potentially responsible parties ("PRP") are identified as follows: (1) "Parties that transported hazardous substances to a site"; (39) (2) "Parties that arranged for disposal of hazardous substances"; (40) (3) "previous owners or operators of sites at the time of disposal"; (41) and (4) "Current owners" of the property. (42) Becoming a responsible party is not dependent on negligence or fault. In other words, there is no innocent purchaser defense. The legal provision of joint and several liability applies. Consequently, the PRP with sufficient funds to pay for clean up must do so. (43)

   From an auditing standpoint, once environmental risks have been identified, the auditor must check for compliance with accounting standards. Accounting guidance provides for environmental disclosures. Generally Accepted Accounting Principles ("GAAP") include the Statements of Financial...